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WEBINAR:On-Demand

Chinas plan to dominate chip manufacturing may be overly ambitious, but the awakening Asian giant has defied the odds before in its drive to become a hardware superpower.

Industry analysts are puzzled about why China would want to attempt such a monumental engineering task. But at least one chip manufacturer isnt just perplexed - its top executive is nearly apoplectic about the move.

Chinas attempt to build 10 chip fabrication plants in each of its major cities would disrupt the industry, Robert Tsao, chairman of Taiwan-based United Microelectronics Corp., said at the Forbes Global CEO Conference in September. "If they achieve their goals, there would be complete chaos," he said.

The worldwide semiconductor industry is in such a slump that 60 of the 100 semiconductor plants are idle, Tsao said. "If China starts to build a huge number of new fabs [fabrication facilities], we would have an industry where a majority of players would lose a lot of money."

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Allan Armstrong, telecommunications research firm RHKs semiconductor analyst, said he was surprised Tsao would say something so controversial in response to Chinas aggressive plans. "It would seem to impact peoples confidence in his business," Armstrong said.

Currently, chip manufacturing - an industry segment separate from chip design - is dominated by three companies: Singapore-based Chartered Semiconductor Manufacturing, Taiwan Semiconductor Manufacturing Co. and UMC. Some of the most modern and efficient chip making plants, though, are operated by IBM in the U.S.

China, which is eager to be accepted as a full partner in the World Trade Organization, has forged alliances with North American and European equipment vendors and is emerging as a hardware powerhouse. This summer, Intel CEO Craig Barrett predicted that within a couple of years, China will be the hardware superstar of Asia, while India will be the continents software giant.

Jay Patel, The Yankee Groups semiconductor analyst, said its not surprising that China wants to grab a share of the chip manufacturing market dominated by Taiwan. "Ten factories [per major city] may be too optimistic," Patel said. "But in five or 10 years, it could make sense."

Making a fabrication plant for semiconductors can be a Herculean task, requiring specialty engineers and experts in metal depositions, gas delivery systems, exotic compounds and ionized water. Even under the best of circumstances, when top engineering talent is in the neighborhood, it takes 18 months to two years to get a fab operational.

Once the plant is completed, the workers mostly go away, as robot arms take over the precision work, leaving few assembly jobs for semiskilled workers. "I just dont see the huge economic advantage of this to mainland China," Armstrong said. "Im puzzled that China would want to do this. I dont know of a lot of expertise they have to add to the picture." China is likely eager to move down the food chain - from an assembler of platforms to a manufacturer of the components that make up those boxes - but the country may not be ready for the shift, Armstrong said.

Meanwhile, regardless of Chinas entrance into the market, each of the worlds chip manufacturers stands to lose a lot of money if they begin manufacturing in volume again too soon or too late. Their decisions got tougher with shipping delays caused by the grounding of air traffic after the terrorist strikes in New York City and Washington, D.C.

Ultimately, Chinas success could depend on when the world recovers from a technology slump and starts demanding more chips. Before the Sept. 11 terrorist attacks, the smart money was saying that a renaissance in semiconductors was six or nine months away. Now, it may take longer. Patel predicted the terrorist attacks will delay the resurgence of the chip making industry by another six months, pushing the start of growth to about this time next year.

But when an upswing in the chip market comes, it may be more robust, analysts said.

While America reels from the attacks, there may be a greater push to expand telecommunications infrastructure with redundant equipment and physical lines as safeguards against another terrorist attack. And there could be a demand for fatter pipes for the last mile to the office because companies will opt for videoconferencing rather than air travel.

The counter-argument is that the U.S. economy is getting worse: The regional Bells were already planning to spend less money next year, and telecom will remain in a slump. But the counter-counter-argument is that telecom is relatively recessionproof, and that demand and spending will grow if the industry doesnt make the mistakes of last year when it went through an orgy of overspending and then a severe overcorrection.

The economy is like a train engine pulling many cars, slamming into a brick wall, Armstrong said. The cars represent carriers, equipment vendors, component makers and chip manufacturers. Chips could be the last to get back on track - and there are no strong indications yet that the industries that should get there first are on their way.

"We may be seeing the bottom now, but it could be a flat bottom. It doesnt mean were pulling out just yet," Armstrong said.

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